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Last
Wednesday morning I wrote an article titled "Gold Stocks are Near a Key
Bottom." When I put the article together I was looking for a bottom in
gold stocks to put my own money to use in. Except for a small position, I
have been out of them for awhile now and have been looking for a bottom in
July/August to mark an end of their summer long consolidation phase.
When
I wrote the article I wasn't sure exactly when or where the bottom would
come. I thought it could happen that day or within a week, but by the end of
that day gold stocks put on a classic "key reversal" by falling
hard on the open and then closing in the green. I had started to average in a
few days before, but built a full position that day, but then ended up
selling out on Friday as the stocks fell back down to my Wednesday entry
point. My thinking was simple - I bought thinking that Wednesday was a
bottom, but when the gold stocks fell back down they negated that possibility
and therefore the reason for my Wednesday trade had proved to be invalid. The
only thing I could do is to sell the position I entered on Wednesday and
reevaluate things.
This
is the type of thing you have to do when you try to game bottoms. Last week
we saw gold stocks fall to a key support level at which they should have
bottomed. They didn't. When you make a trade or take a position you have to
have a rational and reason. If that reason turns out to be wrong then you
must sell your position and look to get back in later or reevaluate your
thinking. Few people do this and that is why most people lose tons of money
in bear markets. How many mutual funds are still holding on to Fannie Mae and
Freddie Mac? From watching CNBC most mutual fund advisors are in denial of
the reality of the bear market.
Now
I still believe that this current drop in gold stocks is going to lead to a
huge buying opportunity. At the moment I write this though I'm not sure
exactly where they will bottom at. I don't look for bottoms simply because
something is down. The market or stock I'm looking at needs to hold at a key
support level - which is what gold stocks appeared they were doing last week
- or else make some technical sign that they are bottoming. Buying just
because something is down and with no game plan can send you to the
poorhouse.
So
let's take a look at the charts for gold stocks and see what we can gleam
from them.
 
Gold
stocks have been in a bull market since 2002. During this time the 200-day
Bollinger Bands for the XAU and HUI have tended to act as support and
resistance. The lower 200-day Bollinger Band for the HUI is now sitting at
377 so you should consider the 375-380 zone as key support for the HUI. For
the past six years the lower 200-day Bollinger Band has only failed to hold
as support for the HUI twice. Once was in 2005 and the second time was last
August when the market went into a mini-meltdown.
During
both of these times the HUI fell 11% below its 200-day Bollinger Band and
then bottomed. After that they bottomed and rallied hard, went sideways for
about a week, and then blasted higher to rally well beyond their 52-week
highs.
What
is more both situations led to extreme oversold levels in the XAU/gold and
HUI/gold relative strength ratios. In fact these ratios are extremely
oversold right now, but that doesn't mean they can't go lower.
In
a Monday morning WSW Power Investor Elite members only note I wrote the
following:
"This
means one of two things."
"Either
gold is going to fall hard and fast to catch up with the oversold readings in
these ratios, but gold stocks won't fall as much as the metal. For instance
we could see gold fall down to 850 while gold stocks actually hold up. That
would give us a powerful signal to go long gold stocks. In 2005 for instance
- forget about it falling below the lower band for a second - gold stocks
lagged the metal badly for week after week. Then all of a sudden the stocks
stopped dropping and the metal continued lower. Something like that could
happen now. Last week I was looking for the stocks to hold support for a buy
point, but if they fail to do that this week then I'll have to look for
another signal to buy."
"If
they don't hold support here then gold stocks will likely go through their
lower 200-day Bollinger Band and have a hard and fast sell-off like they did
in August of 2007 and May of 2005. That would lead to an extreme oversold
condition in the stocks only seen twice in the last six years. Both of those
times led to incredible buying opportunities and if it happened again it
would be another one."
Right
now as I write this I can't say exactly what is going to happen or at what
point I will buy. I can't predict the future. That isn't the point of this
article. What I'm trying to show you are the thinking processes involved in
trying to play bottoms in a market. You need to have evidence that points to
a bottom and then be willing to get out if the evidence turns out to be
wrong. That is what happened to me last week when it comes to gold stocks.
Secondly
I want you to know what is it I'm now looking for to try to show me that gold
stocks have probably bottomed. The bottom line is that I need to see some
sort of evidence that gold stocks have bottomed before I buy back in to try
to play a bottom again. Gold stocks tend to bottom in one of two ways. They
either start to hold up for several days - or even a week - and then turn up
or else they start to hold up while gold continues to drop to start to show
strong relative strength against the metal. Neither of these has happened. It
looked like gold stocks were about to turn up last week, but that was a fake
out. So I'll be watching the gold market carefully going forward for signs of
a bottom.
Once
it comes I still believe it will be an incredible buy point. The bottoms in
2005 and 2007 led to immediate huge rallies in gold stocks. There is no
reason now not to think the same thing isn't going to happen again.
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here.
Mike Swanson
Editor, Wall Street Window
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